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Energy Costs Could Rise If U.K. Leaves Common Energy Market

(Bloomberg) -- The U.K. may scrap the European Union’s rulebook on energy when it leaves the bloc next year, a move that would complicate trading and potentially push up power and gas prices for households and factories.

The government said Thursday it’s considering whether to leave the single market for energy as part of its Brexit planning and will explore how it could access interconnectors that already link the island nation to the continent. But even so, standing outside the common market would complicating the system that allows electricity and natural gas to flow freely across borders.

The option outlined in a paper that details government thinking would bring upheaval to the energy industry, which has been expecting the U.K. to stick closely to the current system. Britain is a net energy importer and has plans to build more electric cables linking its market with European nations as a way of ensuring supplies.

Through its plans to increase interconnections, Britain’s energy strategy sees it relying more, not less, on the rest of Europe, both to provide it with cheap energy and with security of supply, according to Jonas Rooze, an analyst at Bloomberg New Energy Finance in London.

“Not following the same rules will only make energy trading with the rest of Europe more difficult,” he said. “The upshot would be more expensive energy for households and industry, and a more fragile energy system at times of stress in the depths of winter.”

Power already flows between the U.K., France, Ireland, Netherlands and Northern Ireland through four interconnector cables, and work is under way to more than quadruple the capacity of those links. There are also three gas links connecting Britain and the rest of the European Union.

The industry has long argued that the only option for Britain is to keep the current trading arrangements. The U.K. is Europe’s third-biggest energy user with gas imports alone valued at more than 10 billion euros ($11.7 billion) a year. Until now, energy has only been a sideshow in the Brexit discussions, with the White Paper released on Thursday the first signal the government has given on its position.

Ripping up the current arrangements with the EU would leave industry without the legal framework needed to trade gas and power across the English Channel. That would make Britain even more reliant on volatile global energy markets, perhaps forcing it to import more liquefied natural gas to make up for lower imports from its neighbors.

“The market will still expect power and gas to flow” after Brexit, said Alex Harrison, energy partner at Hogan Lovells International LLP. “Nobody knows how access to the internal market will work and if it will be frictionless.”

Another alternative the U.K. is weighing is to stay in the so called internal energy market and preserve the current system of trading arrangements for interconnections, though the paper signaled this is a less favored option. Keeping the current system would require a set of agreed rules including a consistent approach to carbon pricing and the Emission Trading System. The government said it would not agree to a rulebook that committed the U.K. to reaching broader environmental and climate change objectives.

It may even be that energy hasn’t featured heavily in discussions yet. The U.K. says it “wants to explore” with the EU the options for their future energy relationship, according to the document.

“The U.K. is seeking a broad energy cooperation with the EU, including arrangements for trade in electricity and gas, cooperation,” it said in the document. “It is common practice for countries to trade internationally in electricity and gas.”

Also on energy:

Britain wants to participate in Europe’s grid operator groups for both electricity and gas

Obligations to be transparent about trades as well as production and generation will not substantially change

U.K. will seek a relationship with The European Atomic Energy Community that is “more comprehensive and broad than any existing agreement between Euratom and a third country”

Britain is “committed” to enabling Ireland to continue to be a single energy market